• 2Q15 earnings in line
• Softer outlook for rentals
• Upgrade to BUY

2Q15 PATMI down mainly due to lower FV gains

2Q15 PATMI decreased 28% YoY to S$152.5m mostly due to lower fair value gains on the group’s investment properties and higher marketing and distribution costs (sales launch at Botanique at Bartley, ongoing sales at Seventy St Patrick’s, and expenses for OneKM and Pan Pacific Tianjin), partially offset by stronger contributions from progressive recognition from development sales (Katong Regency, Riverbank@Fernvale and Seventy St Patrick’s).

Overall, we deem this quarter’s earnings to be in line with expectations and 1H15 core PATMI now makes up 48% of our full year forecast. Topline over the quarter increased 60% YoY to S$342.2m from S$213.6m in 2Q14 with increased revenues from property development and contributions on OneKM Mall which opened in 4Q14, partially offset by lower revenues from the hotel segment which saw revenues ease 6% to S$98.6m.

Cautious tone on hotel and rental outlook

Management struck a cautious tone regarding the outlook for its hotel segment; in particular, the group expects Singapore room rates to be dampened by slowing visitor arrivals and an increase in supply ahead. Rentals for its investment properties are also likely to face headwinds given the significant office supply anticipated next year and rising vacancies and increased supply in the retail space.

UOL’s 797- unit condominium project has had a decent sellthrough rate and is now 63% sold and we understand that the group will continue to be selective in replenishing its land-bank in the uncertain domestic residential market. As at end 2Q15, net gearing improved to 31% from 34% as at end Dec 2014.

Our fair value estimate dips to S$7.43 (versus S$7.97 previously) on the weaker outlook for its investment assets. Upgrade to BUY on valuation grounds.

Source: OCBC Research - 13 Aug 2015